Want to retire early? Punish yourself now

Some “experts” out there would have you believe that when saving for retirement, a little goes a long way.

It sounds so easy… if you start saving about $25 a day starting at age 25 and presume a pretty modest 5% annual return, you can retire with over a million dollars by the time you hit age 65!

Coming up with $25 a day is easy, right? Skip Starbucks and bring a lunch to the office and you’re pretty much there.

But like so many things relating to money, theory is not the same as practice. Many 25-year-olds lack the discipline, many young workers lack the means and plenty of older Americans find themselves dipping into their nest eggs because of unforeseen hardship.

So while saving a little bit consistently over the long term is indeed a powerful way to save for retirement, it’s not the only way.

My method? Punish myself for short periods of time, saving big instead of saving small.

That’s why for the next two months, my wife and I are both putting almost every penny of our paychecks into our 401(k) plans.

How ‘burst saving’ works

Over the last few years, the idea of “burst saving” has become more common. That’s because those who embraced a slow-and-steady approach to retirement were shaken by the housing crash, layoffs or other damage from the recent financial crisis.

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Too many advisers lack a succession plan, which can hurt their families and clients, says Focus Financial Partners CEO and founder Rudy Adolf. As the average age of advisers continues to climb, this is an increasingly pressing problem, he says. His firm has a possible solution.

A lot of people have had to catch up since the Great Recession. And their shared approach is simple: making saving your first priority, and pay yourself later.

According to research firm Hearts & Wallets, 64% of burst savers built a retirement account equal to 10 times their annual pay using this method — a common savings goal recommended by financial advisors. But what’s even more interesting is that these power savers were more likely to hit this target regardless of when they started saving, even if it was in their 40s.

That’s proof positive that it’s never too late to catch up, if you have the discipline.

But burst saving isn’t just for those who are lagging behind. If you want to save quickly to retire early or if you want to live a very comfortable lifestyle in your 60s, this approach can supercharge your retirement — especially if you start early.

Let’s run some numbers to show a working example:

A 35-year-old man who makes $70,000 a year has zero in retirement savings, but finally decides it’s time to play catch-up. So he socks away $7,000 annually at a 5% rate of return, reaching $700,000 by age 65 — 10-times his annual salary.

Now, if that 35-year-old maxed out his 401(k) for just the first three years, saving $17,500 annually — the maximum pre-tax contribution the IRS allows — before backing down to $10,000 in year four, he’d finish up with over $790,000 presuming a 5% annual return on his savings.

And if he maxes out his 401(k) contribution for the first five years before rolling back to just $10,000 in annual contributions, by 65 he would have over $840,000.

Think about that: By saving an extra $7,500 for just the first five years of this plan — $37,500 total — this 30-something would finish with an extra $140,000 in the bank.

That’s the power of burst savings, coupled with the power of compound interest.

Tax benefits

If you have a 401(k), deploying this strategy is doubly beneficial because it can drastically reduce your burden with the IRS in addition to powering your retirement portfolio.

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